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tv   [untitled]    February 8, 2012 2:30pm-3:00pm EST

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hello and welcome across town people about facebook's initial public offering is being called a very big deal and many hope the i.p.o. will lift the entire tech sector but is the i.p.o. a good one will public ownership of facebook negatively impact the company's success and is it a profitable investment. to cross-talk facebook's i.p.o. i'm joined by jay ritter in gainesville he's a professor of finance at the university of florida and in toronto we cross to peter leeds he's a financial analyst and publisher of the peter leeds newsletter or a gentleman cross-talk rules in effect that means you can jump in anytime you want and i really very much encourage it if i could go to peter leeds in toronto on the face of it is this going to be a good pipe good i.p.o.
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will be successful and is it a good long term investment this for me on the show peter i think first the price is going to go up i think to be successful i.p.o. on first glance but then you're going to have to look at the valuation ratios you know it's going to add one hundred times earnings twenty five times revenues that's way too high we think a lot of people are going to jump into it just because it is facebook everything is going to go the price further and at the end of the day this stock over time will start coming back down jay what do you think about that i mean more hype in a common sense being. how did here when we look at this i.p.o. i mean i obviously facebook is very very popular but is its popularity reflected in its valuation. i think peter's scenario is very plausible with the huge brand name recognition it's possible that investors are going to drive up the price especially since
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a relatively small percentage of the company is being sold at the valuations that people are talking about one hundred times sales twenty five hundred times earnings twenty five times sales the wall in the run upside for investors that is a limited ok if i go back to peter in toronto i mean last year facebook generated i don't want three point seven billion dollars eighty eight percent up from the year before those kind of numbers are not sustainable are they. what's going on in north america you have to divide it between you know developing nations and developing nations development north america for example europe they've pretty much got critical mass there they're not going to get a lot more people anybody who's on facebook is going to be on facebook is already there there's a lot of room for growth all the growth is coming from developing nations now russia india china but the problem with that is they're not able to convert that into the same degree of revenues from the advertisements it's in tory's for not
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driving as much advertisement spending of retirement dollars and so a lot of the growth may be behind facebook and going forward it might have a little bit of trouble getting to the next level ok jane look who's going to buy this stock i mean you can see institutional investors i mean pensions i mean individuals who do you think it's most attractive to it because you know institutions are are not really represented on facebook i mean people are ok is that the people that are on facebook to be interested in the stock do you think. this is some of them with over eight hundred million users it doesn't take a very big percentage of them to be interested but the reality is institutional investors if they are going to buy buy a lot more shares an individual might buy one hundred two hundred even five hundred shares but an institution might be buying a million shares five million shares and a lot of institutions are going to be buying ok peter i mean is there some
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precedence out there we look at the tech sector and the what the most well known ones are google and america online which way what president do you think facebook might follow or will it be just unique. it's going to be unique but they are going to have a lot of competition from google plus google's decided to get into the social media space and they're going to do that pretty aggressively and overseas they've got a lot of competition too from brazil and china india you know these are these are nations where they have a platform there that they're going to start leveraging their platform to ensure we do users away from facebook facebook's tori's problems trying to get into china at all so you're going to have a lot of people who more choice going forward they haven't had a lot of competition yet with those days are ahead of them and now they're going to see you know we have to see how they're going to react to that it's interesting you point out i mean in russia facebook is not particularly popular it's here but
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there's a russian version that many people are very attracted to jail if we could if we can look at the emerging markets one of the interesting things is and we advertising dollars is a big part of the future of any company like facebook in emerging markets people do not necessarily are attracted to the to the ads because they're there they're spending ability is much more limited than let's say in north america or the english speaking world i mean is this something that's being played into it you can grow the numbers but you're not going to get any revenue from them. we well there's an issue of how many users and then the revenue per user the per capita income growth in certain emerging markets does result in a lot of long term upside potential. lower middle income consumers rise to be middle income and higher middle income consumers
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the bullish case for facebook is actually based upon the google model where google has demonstrated that a lot of money can be made on targeted search it's a very efficient form of advertising and google has been able to grow its revenue per user very substantially facebook has a lot of that upside potential as well but things could go wrong. while america online had a very large market share fifteen years ago and largely faded research in motion with blackberry had a very big market share a couple of years ago and they've run into some tough times so with facebook they they've got a wired and growling potential market
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a case can be made that they're going to be as successful as google generating profits. of nine point seven four billion dollars just thirteen years after being founded but on the other hand they could fall off of that growth path as well and that's the problem with the very high valuation that people are talking about that that it's a bad optimistic growth path built into the price and it doesn't leave nothing. possibility that they're going to fall off of that growth path targeting advertising is very interesting peter because on facebook particularly there's the privacy issue in people getting more and more sensitive to that issue and targeted advertising is the contradict is a antithetical to privacy is this something that investors should be worried about and thinking about because the the users of facebook want their privacy at least most of them do and of course the advertisers want to know as much as possible
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about these people and you know that facebook is going to have to make a decision maybe even make a compromise which could also hurt its image and maybe its popularity. that's an excellent point peter what's going on right now think of it like a seesaw where on one side you've got google or facebook trying to maximize their advertising targeting by watching everything you do on the other side of the teeter totter you've got people who are tired and weary of all their actions being tracked and most recently we've had all sorts of backlash in terms of privacy issues with the issues and with the google problems and now you've got you know facebook's tried to address this by having you know twenty or twenty years of audience with the f.c.c. for privacy they've also change their privacy laws but at the end of the day people don't trust the internet when they go on there and when they're going around on facebook it's tracking what books you like what videos you watch who you are who your friends are and it's going to be a little bit too much i think and people are starting to have a little bit of
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a backlash against it when you think about that jamie it's the flavor of the month right now as we go down i mean people are going to invest in this company because they want to make money not just because they like facebook maybe there's an overlap of the two but people get to go in there and they go to want to be very aggressive because i want this company to perform in the valuations are very high they want the valuation to meet expectations do you think that you know this is facebook's going to have a real challenge in dealing with the privacy issue and with sales because there's high expectations here like we haven't seen for a while. well with the privacy issue. there's kind of an anonymous lack of privacy and terms of it doesn't bother me if. google or facebook or linked in. able to tell some advertiser i'm one of forty seven thousand and nine and this ip
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addresses that have some of the following characteristics in terms of my age a rough guess for my income level and the fact that i subscribe to several business magazines and do a lot of international traveling. you know if it's not identifying me by name does it bother me that some targeted ads get sent my way and that i don't get that i have absolutely no interest in. you know in terms of that and the name it is just a number that doesn't bother me. in the other hand if you've got some government is demanding. we want the names behind the ip addresses that's another issue ok peter jay told me before the program he's not on there's another guy i'm on facebook and you're on facebook i mean do you check any of the ads you click on any of the ads on facebook. i never have i never as
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a dress your guests last point in. and the fact that you know you could be on facebook is tracking what you like and what you do at work somebody walks by and sees you want facebook on your monitor and on the side is a whole bunch of ads that are going to be related to what you like you might not want that person to know that you are interested in overseas vacations or whatever it may be and so there's a bit of a privacy breach there i think because it's going to put ads that are appropriate to what you've been looking at on your facebook page for people to walk by and see ok gentlemen we're going to go to a short break and after that short break we'll continue our discussion on face stay with our.
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if she. gets. close.
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and you can see. the from the. least so. the microphones talk i can hold on to mind you were talking about facebook's i.p.o. . slow. slow slow. and now we're joined by carrots ferry in philadelphia he's founder of market tamer dot com if i can go to you first gareth dana and now philadelphia thank you for joining us here one of the things we're talking about earlier in the program is the facebook's ability to expand one thing that's very interesting about the eight hundred forty million forty five million users that half of them go for use the facebook from mobile instruments you know i got an i pad or something like
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that and facebook gets zero revenue from that if people are accessing it from their telephone is this going to be have to be the next major breakthrough for us for facebook and other social networking because i'm not going to pay for advertising on my telephone i don't know anyone who will. well i think what's interesting about facebook is they can actually generate money even if people are not clicking so they can generate from brand awareness just by impressions being placed on phones so if you are looking for example at the numbers four hundred million plus mobile users that set to increase that at the rate they're generating returns from the regular platform which is about five dollars close to five dollars per user if they can figure out how to monetize that channel that's potentially another four hundred million times five that's two billion dollars in returns and
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revenues to the top line that they can generate which would increase their revenues from current levels by almost fifty percent you know that would be very good news peter if i go to you you know and we look at the business model that facebook has right now and it's been very profitable very successful but as we mentioned earlier in the program it's not sustainable because you're not going to have you need a lot more users you know a multiple of or have a much more and add generation when it comes to revenue is it is facebook i have to find another breakthrough in social networking to really match the expectations people have for this i.p.o. and further down the line. i think they will i mean right now eighty five percent of their revenue comes from advertisements and like you said you know that right now there's four hundred million people who are using facebook through their mobile phones and there's you know there's no ads being shown there and when they eventually you know they're working on it right now but you know people don't want to click on ads on their phones and you can't assume that the revenue stream from the mobile phones is going to at all equal what's going on with the desktop
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computers in the past and at the same time you know most of the growth like you said earlier is coming from these developing nations where there's a lot less revenue coming in even from the ads they display jay what do you think about the business model that facebook has i mean to what do you i think everyone would agree it's successful to this point but is when we look at public investors by i mean private investors in this company right now how much is it going to change i mean how much is the management going to change and investors obviously want to return on their in their in their own investment i mean how much pressure is likely to put on the management of facebook because they haven't had to face it before. but i think google is the appropriate analogy there both companies have dual class share structures where management basically controls the votes and the public market shareholders have relatively limited control now with facebook. just like with google the
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founders the controlling shareholders. in paper are wealthy. in google's situation there hasn't been a mass exodus of top management even though they don't have to work for a living and based upon that precedent i don't think there's going to be a dramatic difference with facebook a they certainly want the company to generate a lot of profits too so that when they sell the stock they can sell it at a high price but they don't have to worry all that much. pressure to meet this quarter's earnings tired that basically management is entrenched whether the public market shareholders like it or not ok peter would you think that's going to change because we have facebook made comments made compromises in the past to in favor of
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the user instead of profit be very open about that do you think that's going to change you think it's going to have to change. i think from this point forward when they do the i.p.o. in may everything changes i think the corporate culture changes you know all the key players are going to be multi-millionaires do they show up to work at the same time do they work as hard nobody knows you know and they're also going to use a lot of this money that they raise to bring in more people you bring in fresh blood you know that can be good but it's also going to change the corporate culture of what they were working for him up to this point is going to change and we'll see how that plays going forward but i'm not very optimistic gary what do you think about that i mean if you become a you know a multimillionaire overnight what kind of initiative is it going to be for you to go to work every day or maybe go out on your own and start your own company your own ideas i mean how much of is this a threat to the core corporate culture of facebook after the i.p.o. well there's no doubt that the incentives for employees will have reduced one of
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the great attractions to the startup culture is the possibility in the person perspective of one day going i.p.o. and cashing out this point in time those employees are in a position whereby they've effectively generated the returns they once hoped when they join the company and at this point in time it becomes very difficult for the management to keep that talent in place however if we look at the s one we see zuckerberg talk very extensively about the nation of the company and the reason i believe he's promoting that so heavily is he's trying to take attention away from profitability of the company itself to meet quarterly earnings targets and in the fourth year of these i'm going to be very popular with investors really he won't be popular with investors that he's going to behave that way i mean that it's ridiculous ok i mean how can you justify that when other people own the company.
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well i think that's the challenge in fact corporate governance is a very big issue we saw one of the pension funds come out just this morning and state that they have grave concerns over the fact that he has such an iron fisted control over this company he's got very very substantial control over the direction in the future and indeed the earnings and the financials one thing to note however is he did send a signal to the market that he has very strong control over the financials he sent a statement by looking at the s. one the net income was one point zero zero zero billion it wasn't you know one million above or below that and i believe that was him sending a signal to the markets that he knows exactly how to grow the financials here both top and bottom line jay if i can go to you it seems to me it cuts both ways because
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i mean we have a very successful c.e.o. already i mean when he's twenty seven years old i mean i think a lot of you'd best years on the other on the other hand would say leave him alone let him do what he wants look what he's created i mean it cuts both ways in looking at how management will change. i think that's true however the corporate culture in the us. is true magically different than in russia. partly the laws are different partly the enforcement of the laws are different but also the corporate culture is a lot different in terms of executives who looped the company who don't grow shareholder value lose a lot of social prestige. and unfortunately that's not true in every country and i think that. is going to be
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very. loath to not. live up to expectations and investors are saying hey you know we're counting on you to grow profits to keep this as a financially successful company i don't think he's going to use his voting control to go off on flights of fancy and say thank you shareholders public market shareholders you gave me some money. and i'm taking it and doing what i want with it you know you've got lots of employees as well that own shares and they care about the stock price they're not going to be happy if the company doesn't achieve financial goals that make public market investors willing to pay a high price you know peter it's very interesting in looking at zuckerberg background here he's not motivated by money at all i mean again it kind of cuts
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both ways doesn't it i mean he's more focused on the idea and not money fortunately for him the idea has created a lot of money do you think is this streak is going to continue we should just continue the way he is. well peter that's a great point he is proven time and time again that he's never been about making money ironically that put him on the seventeenth richest person on the earth and you know but he's made it quite clear he's not about making money and i think that people are putting that concept on to him in assuming that because now there are you know getting a part of facebook and as a public company that he's going to be trying to do what's in their best interest and he's never said that he would do that he's got about twenty percent of the voting control of the company but with that he's got the you know this preferred a preferred being common stock he's got the ability to put the board members in the ability to basically do whatever he wants now you've got to ask yourself this age with this much money and the success he's had is he about making a bunch of people on wall street more money or is keeping this facebook concept as
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pristine as he has up until this point and i think it's going to be the latter what do you think what is going to be make while wall street even more richer is it going to be about innovation in going to web three point. i think there's no doubt that innovation is his primary motivator here but with that said he also does have substantial pressures on him that were not there in the past as a private company now with the public company he will be scrutinized to a much greater extent and looking to the future what he's really got to figure out is how to monetize beyond the facebook platform looking to add revenues like google does on multiple other sites and historically they haven't done so well at that but there's no doubt that he's motivated to make facebook success beyond its own platform that's one of the reasons it's really the internet idea it's
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a user authentication platform i mean we've all run on a few i'm fascinated in discussion here we'll see if the market says it likes the i.p.o. or not many thanks to my guests in philadelphia gainesville and in toronto and thanks to our viewers for watching us here are seeing next time and remember. any. critic free. free. free. free. free. free. video for your media.
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and then too the bloodshed in syria will only be found if both government and opposition forces later talk. regime change rhetoric and recall their ambassadors from damascus will have live comment on syria a little later here and also. because. it's worked for many many years for the seat of the mother of. fury in the u.k. it's a terror suspect dubbed al-qaeda spiritual leader in europe. back to the streets of london after the european court of human rights for deportation. and the first signs of a rift between the u.s. and post mubarak egypt says washington's threats to halt. change its position on
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the so-called crackdown on western n.g.o.s our top stories this hour. international news and comment live from moscow this is twenty four hours a day the syrian opposition say the city of homs has come under the heaviest attack yet in days of intensive fighting between armed groups and government forces activists say hundreds of people have been killed by army shelling since friday the government denies the assault journalist down and says reports from homs are difficult to verify. it seems like the situation hamas has been asked for the last five days with fear fierce fighting between the what they call themselves the free syrian army and the military forces by the syrian government the syrian government has a warning to.


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